Zs, Cloudflare and Crowdstrike. Takeaways after ERs

Investment Analysis Clubs Saul’s Investing Discussions
1

The zero trust security market is forecast to triple to $82B by 2030, spurred forward by growing demand for cybersecurity products to combat rising cybercrime incidents.
-Statistica

I am expecting ‘acceleration’ in my CyberSecurity portfolio, taking share from the above growth.

Cloudflare’s revenue growth trend?
After Q2-
Q1 +5.6%, and now Q2 +6.3% despite seasonality. Cloudflare guided for $330.5M (7.1% QoQ, 30% YoY) and after extrapolating Q4, QoQ revenue growth went from 5.6% in Q1 to 6.3% in Q2 and is guided to 7.1% in Q3 and I can expect 7.7% in Q4. To keep everything in context, Cloudflare RevGrowth QoQ: Q4 8.2% was their weakest since IPO, to date.

Crowdstrike looking good, grew ARR by 37% YoY.
Bert-
…numbers that the company delivered outside of endpoint security were just staggering. The company entered the SIEM space just over a year ago. Its major competitor in that space is Splunk; Splunk grew 12% last quarter and Crowdstrike is approaching $100 million of ARR, up by 200% year over year. The company offers an Identity protection solution that is based on the technology acquired when it bought Preempt. This business is now at a $200 million ARR level, having grown 194% year on year. The company is also seeing substantial traction in XDR as it leverages the technology of its acquisition of Humio.

Possibly under-appreciated, IMO:
George Kurtz, in prepared remarks from Q2 CC-
“The cloud security market opportunity is massive and growing rapidly with the potential to reach $18 billion in calendar year 2026. Cloud exploitation by adversaries increased 95% year-over-year and the only way to stop threats at all time is with a fully-fledged agent and agentless cloud suite like Falcon. Only CrowdStrike delivers a fully integrated CNAPP solution that unifies cloud workload protection, cloud security posture management, cloud infrastructure entitlement management, threat intelligence and threat hunting in one platform across hybrid and multi-cloud environments. Our leadership in cloud security was recognized in Frost & Sullivan’s recently published 2023 Frost Radar, Cloud Workload Protection Platform report based on our impressive CWPP business growth, our comprehensive cloud visibility and our unrivaled cloud detection and response services.”.

And then…
Zscaler reported 38% Billings Growth YoY, last week, and grew large customers by 7.3% QoQ, significantly exceeding my expectation. What moved me most, Zscaler grew $1M customers by 12.3% QoQ, adding a record 49 this Q.

9/6/23
Kept my ~10% position in Crowdstrike. Sold some of my ~19% position in Cloudflare to buy back a ~5% position in Zscaler after Earnings.

Best,

Jason

62 Likes
2

Interesting Jason - thanks for the head to head comparison, although I also try to keep one eye on Palo Alto’s numbers as like it or not it does compete across the board. I thought ZScaler’s quarter was the best of the 3.

FWIW I also hold all 3 at roughly 2.5% Cloudflare, 2.5% ZScaler and 7% Crowdstrike.

From a pure revenue growth performance standpoint I feel I am underweight in ZScaler which seems to be 1 quarter in growth durability maintenance ahead of Crowdstrike and 2 quarters ahead of Cloudflare, (although all seem to be on the same downward trajectory).

From a market positioning and risk perspective I guess Cloudflare is more diverse in its revenue streams, then Crowdstrike with its broader cybersecurity portfolio and then ZScaler with its relative focus. Although it all 3 appear to be broadening their range of offerings and solutions suggesting that the Palo Alto “platformisation” of the space is real and competition between the players will increaser wtih a greater and greater amount of overlap.

One aspect I do like about the ZScaler model is the large enterprise client and large deal size model supported by C-suite engagement in commercial and Fed-Ramp in Government.

Ant

22 Likes
3

i believe Cloudflare has seen trough in growth rate… should at-least maintain if not bounce back… due to rvamped sales team and AI related tailwinds… whereas both CRWD and ZS should continue its slow deceleration conforming to law of large numbers… just my working thesis… I have NET ~8% and ZS ~5% with CRWD no position as I am also concerned that new PC / laptops slow down and full employment reflect little growth in end points… even though CRWD takes market share from legacy end points, street may not be as excited about end point security specialist… having said that I hold ~2% in S due to its much lower valuation and cloud workload traction (certainky worried about end points which is why this is small position despite very attractive valuation)

17 Likes